UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIESEXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 0-33419
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PHSB Financial Corporation
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(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 25-1894708
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
744 Shenango Road, Beaver Falls, Pennsylvania 15010
- --------------------------------------------- -----
(Address of Principal Executive Offices) Zip Code
Registrant's telephone number, including area code: (724) 846-7300
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Securities registered pursuant to Section 12(b) of the Exchange Act: None
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Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.10 per share
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). YES NO X
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The aggregate market value of the voting and non-voting stock held by
non-affiliates of the Registrant, based on the closing price of the Registrant's
Common Stock as quoted on the Nasdaq National Market, on March 5, 2004, was
$65.9 million.
As of March 5, 2004 there were 2,903,353 shares issued and outstanding
of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
December 31, 2003. (Part II)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders for
the Fiscal Year ended December 31, 2003. (Part III)
Forward-Looking Statements
PHSB Financial Corporation (the "Company") may from time to time make
written or oral "forward-looking statements", including statements contained in
the Company's filings with the Securities and Exchange Commission (including
this annual report on Form 10-K and the exhibits thereto), in its reports to
stockholders and in other communications by the Company, which are made in good
faith by the Company pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing these risks.
The Company cautions that this list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
PART I
Item 1. Business
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General
On July 9, 1997, Peoples Home Savings Bank (the "Bank") reorganized
from a Pennsylvania mutual savings bank into a mutual holding company structure
and formed PHS Bancorp, M.H.C. As part of the reorganization, the Bank became a
Pennsylvania chartered stock savings bank and issued shares in a public offering
to certain of its depositors and to PHS Bancorp, M.H.C. Additionally, on
November 9, 1998, the Bank reorganized into a stock holding company and formed
PHS Bancorp, Inc. As part of this reorganization, the Bank's public shareholders
and PHS Bancorp, M.H.C. exchanged their shares of common stock for PHS Bancorp,
Inc. shares of common stock.
On December 20, 2001, the Company completed its stock offering in
connection with the conversion and reorganization of the Bank and its holding
company, PHS Bancorp, Inc., from the mutual holding company form of organization
to a full stock company. As part of the conversion and reorganization, the
shares formerly held by PHS Bancorp, M.H.C. were cancelled and the Company sold
2,201,191 new shares to the public and the shares held by stockholders of PHS
Bancorp, Inc. were exchanged for 1,295,918 shares of the Company.
The Company conducts no significant business of its own other than
holding all the outstanding stock of the Bank. The Company principally operates
through its main office, nine branch offices and an administrative office
located throughout Beaver and Lawrence Counties, Pennsylvania. The Company is
primarily engaged in the business of attracting deposits from the general public
and offering traditional mortgage loan products, commercial loans and consumer
loans, which primarily consist of automobile loans. As a result, references to
the Company throughout this document generally refers to the consolidated entity
which includes the main operating company, the Bank, unless the context
indicates otherwise.
Competition
The Company is one of the many financial institutions servicing its
market area which consists of the counties of Beaver, Lawrence, Allegheny and
Butler, Pennsylvania. The competition for deposit products comes from other
insured financial institutions such as commercial banks, thrift institutions,
credit unions, and multi-state regional banks in the Company's market area.
Deposit competition also includes a number of insurance products sold by local
agents and investment products such as mutual funds and other securities sold by
local and regional brokers. Loan competition varies depending upon market
conditions and comes from other insured financial institutions such as
commercial banks, thrift institutions, credit unions, multi-state regional
banks, and mortgage bankers.
2
Lending Activities
Analysis of Loan Portfolio. The following table sets forth information
concerning the composition of the Company's loan portfolio in dollar amounts and
in percentages of the total loan portfolio as of the dates indicated.
At December 31,
--------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------ ---------------- ------------------ ---------------- -----------------
$ % $ % $ % $ % $ %
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
(In thousands)
Mortgage loans:
One-to-four family (1)........... $ 58,871 38.21% $ 65,395 39.32% $ 61,093 43.94% $ 57,999 44.58% $ 53,184 44.62%
Multi-family .................... 970 0.63 752 0.45 723 0.52 755 0.58 388 0.33
Construction..................... 770 0.50 947 0.57 3,999 2.88 1,778 1.37 1,614 1.36
Commercial....................... 8,185 5.31 5,900 3.55 5,224 3.76 2,760 2.12 541 0.45
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total Mortgage loans............... 68,796 44.65 72,994 43.89 71,039 51.10 63,292 48.65 55,727 46.76
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial loans:
Taxable loans.................... 1,266 0.82 1,348 0.81 2,227 1.60 2,461 1.89 4,087 3.43
Tax exempt loans................. 19,726 12.80 23,584 14.18 4,479 3.22 4,628 3.56 641 0.54
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total Commercial loans............. 20,992 13.62 24,932 14.99 6,706 4.82 7,089 5.45 4,728 3.97
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer loans:
Automobile....................... 48,932 31.76 54,996 33.06 49,021 35.26 48,361 37.18 48,026 40.29
Consumer credit line............. 7,712 5.01 6,865 4.13 6,217 4.47 6,130 4.71 5,547 4.65
Other(2)......................... 7,648 4.96 6,532 3.93 6,054 4.35 5,216 4.01 5,161 4.33
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total Consumer loans............... 64,292 41.73 68,393 41.12 61,292 44.08 59,707 45.90 58,734 49.27
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans...................... 154,080 100.00% 166,319 100.00% 139,037 100.00% 130,088 100.00% 119,189 100.00%
====== ====== ====== ====== ======
Less:
Loans in process................. 597 915 2,221 1,204 707
Deferred loan fees............... (1,749) (1,948) (1,691) (1,588) (1,623)
Allowance for losses on loans.... 1,648 1,684 1,506 1,455 1,360
-------- -------- -------- -------- --------
Total loans, net............... $153,584 $165,668 $137,001 $129,017 $118,745
======== ======== ======== ======== ========
- ------------
(1) Includes home equity and junior lien mortgage loans.
(2) Consists primarily of secured and unsecured personal loans.
3
Loan Maturity Tables. The following table sets forth the maturity of
the Company's loan portfolio at December 31, 2003. The table does not include
prepayments or scheduled principal repayments. Prepayments and scheduled
principal repayments on loans totaled $93.6 million for the year ended December
31, 2003. Adjustable-rate mortgage loans are shown as maturing based on
contractual maturities.
1-4 Family Other
Real Estate Real Estate Commercial
Mortgages Mortgages Loans Consumer Total
--------- --------- ----- -------- -----
(In thousands)
Amounts Due:
Less than 1 year............ $ 241 $ 942 $ 15,061 $ 7,158 $ 23,402
After 1 year:
1 to 3 years.............. 1,339 718 3,298 13,390 18,745
3 to 5 years.............. 4,802 1,312 947 32,677 39,738
5 to 10 years............. 10,771 3,083 911 8,501 23,266
Over 10 years............. 42,488 3,100 775 2,566 48,929
-------- -------- -------- -------- ---------
Total due after one year.... 59,400 8,213 5,931 57,134 130,678
-------- -------- -------- -------- ---------
Total amount due............ $ 59,641 $ 9,155 $ 20,992 $ 64,292 $ 154,080
======== ======== ======== ======== =========
The following table sets forth as of December 31, 2003, the dollar
amount of all loans due after December 31, 2004, based upon fixed rates of
interest or floating or adjustable interest rates.
Floating or
Adjustable
Fixed Rates Rates Total
----------- ----- -----
(In thousands)
One-to-four family......... $ 58,680 $ 720 $ 59,400
Other mortgage loans....... 7,297 916 8,213
Commercial................. 3,758 2,173 5,931
Consumer................... 57,133 1 57,134
--------- -------- --------
Total.................. $ 126,868 $ 3,810 $130,678
========= ======== ========
One-to-Four Family Loans. The Company originates one-to-four family
loans with fixed rates of interest for terms of 15 to 30 years and also offers a
one-year adjustable rate loan with an interest rate indexed to the one-year
Treasury, with a cap on interest rate increases of 2% per year and 6% over the
life of the loan. The original contractual loan repayment period on residential
mortgage loans generally
4
average 20 years. However, the average life based upon the Company's experience
has been approximately 10 to 12 years.
Pursuant to underwriting guidelines adopted by the Board of Directors
the Company's maximum loan to value ratio is 95% of the lower of sales price or
appraised value. Private mortgage insurance must be obtained on all residential
loans for which loan-to-value ratios exceed 80%. Property appraisals on the real
estate and improvements securing single-family residential loans are made by
qualified independent appraisers approved by the Board of Directors. Appraisals
are performed in accordance with applicable regulations and policies. The
Company obtains title insurance policies on all first mortgage real estate loans
originated.
The majority of the Company's one- to-four family residential loans are
underwritten in accordance with Freddie Mac or Fannie Mae guidelines to
facilitate their sale in the secondary market (although the Company usually
retains residential mortgages for portfolio). Substantially all of the Company's
residential mortgages include "due on sale" clauses, which are provisions giving
the Company the right to declare a loan immediately payable if the borrower
sells or otherwise transfers an interest in the property to a third party.
Included in the Company's one- to- four family loan portfolio are home
equity loans and second mortgage loans. Home equity and second mortgage loans
are generally fixed rate with interest rates based on market rates. In most
instances, the Company holds the first lien on a second mortgage. At December
31, 2003, such loans totaled $4.7 million, or 8.0% of the Company's one-to-four
family portfolio.
Multi-Family Residential Real Estate. Multi-family residential real
estate loans are permanent loans primarily secured by apartment buildings.
Multi-family residential real estate loans can be originated in amounts up to
75% of the appraised value of the mortgaged property. The Company makes both
adjustable and fixed-rate multi-family residential real estate loans. The
adjustable rate loans have terms of up to 15 years, the rate of interest is tied
to the Wall Street Journal prime rate.
Construction. The Company will occasionally originate loans to finance
the construction of one- to four-family residences. Constructions loans
typically are originated directly to the owners of pre-sold single-family houses
that are being built, and generally convert to a permanent loan upon completion
of construction. Construction loans require payment of interest only during the
construction period and are offered at rates comparable to the Company's one- to
four-family permanent mortgage loan rates.
Commercial Real Estate. Commercial real estate loans are permanent
loans secured by improved property such as office buildings, retail stores, and
other non-residential buildings. Essentially all originated commercial real
estate loans are within the Bank's market area. Commercial real estate loans can
be originated in amounts up to 75% of the appraised value of the mortgaged
property. The Company makes both adjustable and fixed-rate commercial real
estate loans. Commercial real estate loans are primarily adjustable rate loans
with terms of up to 15 years, with the rate tied to the Wall Street Journal
prime rate.
Commercial Loans. Commercial loans generally are deemed to entail
significantly greater risk than that which is involved with real estate lending.
The repayment of commercial loans typically is dependent on the successful
operations and income stream of the borrower. Such risks can be significantly
affected by economic conditions. In addition, commercial lending generally
requires substantially greater oversight efforts compared to residential real
estate lending.
5
Commercial loans are generally provided to various types of
closely-held businesses located principally in the Company's primary market
area. The Company's business loans may be structured as term loans or as
revolving lines of credit. Commercial loans generally have terms of seven years
or less and interest rates which are fixed or float in accordance with the prime
rate. Commercial loans generally are secured by equipment, machinery or other
corporate assets and the Company generally obtains personal guarantees from the
principals of the borrower.
Tax exempt Loans. Tax exempt loans primarily consist of loans to local
municipalities and school districts. These loans generally are deemed to entail
less risk than that which is involved with other types of lending because the
taxing powers of these entities permits them to raise taxes to cover their
obligations. Tax exempt loans are generally written with terms up to five years
and are generally secured by the taxes and receipts of the municipalities and
school districts.
Consumer Loans. Consumer loans primarily consist of indirect automobile
loans. Indirect automobile loans are generally originated with terms of up to 6
years depending on the age of the automobiles. Indirect automobile loans are
underwritten by the Company and a fee is remitted to the automobile dealer upon
the successful underwriting and closing of the loan. The fee is rebated to the
Company, on a pro rata basis, if the loan is repaid within the first six months
and in full if the loan defaults. The Company generally does not have recourse
against the automobile dealer in the event of a default by the borrower. Each
indirect auto loan is originated in accordance with the Company's underwriting
standards and procedures, which are intended to assess the applicant's ability
to repay the amounts due on the loan and the adequacy of the financed vehicle as
collateral. Indirect automobile loans are secured by the new or used automobile.
Loans secured by assets that depreciate rapidly, such as automobiles, are
generally considered to entail greater risks than one-to- four family
residential loans.
The Company's other consumer loans include credit card loans, and
secured and unsecured personal loans. Secured consumer loans are generally
collateralized by secondary liens on real estate. Unsecured consumer loans are
only made up to $35,000.
Loan Solicitation and Processing. The Company's primary source of
mortgage loan applications is referrals from existing or past customers. The
Company also solicits loan applications from real estate brokers, contractors,
and call-ins and walk-ins to its offices. The Company advertises in local
newspapers for first mortgage and home equity loans.
Upon receipt of any loan application from a prospective borrower, a
credit report and verifications are ordered to confirm specific information
relating to the loan applicant's employment, income and credit standing. An
appraisal of the real estate intended to secure the proposed loan is undertaken
by an independent fee appraiser. In connection with the loan approval process,
the Bank's loan officers analyze the loan applications and the property
involved. All residential, home equity, multi-family, construction and
commercial real estate loans are processed at the Company's main office by the
Company's loan servicing department. The Board of Directors approves all loans
over $100,000.
Loan applicants are promptly notified of the decision of the Company by
a letter setting forth the terms and conditions of the decision. If approved,
these terms and conditions include the amount of the loan, interest rate basis,
amortization term, a brief description of real estate to be mortgaged to the
Company, tax escrow and the notice of requirement of insurance coverage to be
maintained to protect the Company's interest. The Company requires title
insurance on first mortgage loans and fire and casualty insurance on all
properties securing loans, which insurance must be maintained during the entire
term of the loan.
6
Loan Commitments. The Company, generally grants commitments to fund
fixed-rate single-family mortgage loans for periods of up to 90 days at a
specified term and interest rate. At December 31, 2003, total aggregate
commitments to extend credit were $22.5 million.
Non-performing Loans and Problem Assets
Loan Delinquencies. When a mortgage loan becomes 15 days past due, a
notice of nonpayment is sent to the borrower. If such payment is not received
within 15 days after the initial notice has been sent, an additional notice of
nonpayment is sent to the borrower. After 60 days, if payment is still
delinquent, a notice of right to cure default is sent to the borrower giving 30
additional days to bring the loan current before foreclosure is commenced. If
the loan continues in a delinquent status for 90 days past due and no repayment
plan is in effect, foreclosure proceedings will be initiated. The customer will
be notified when foreclosure is commenced.
Loans are reviewed on a monthly basis and are placed on a non-accrual
status when the loan becomes more than 90 days delinquent or when, in the
Company's opinion, the collection of additional interest is doubtful. Interest
accrued and unpaid at the time a loan is placed on nonaccrual status is charged
against interest income. Subsequent interest payments, if any, are either
applied to the outstanding principal balance or recorded as interest income,
depending on the assessment of the ultimate collectibility of the loan.
7
Non-performing Assets. The following table sets forth information
regarding nonaccrual loans and real estate owned, as of the dates indicated. The
Company has no loans categorized as troubled debt restructurings within the
meaning of the Statement of Financial Accounting Standards ("FAS") No.15 and no
impaired loans within the meaning of FAS No. 114, as amended by FAS No. 118.
Interest income that would have been recorded on loans accounted for on a
nonaccrual basis under the original terms of such loans was $30,000 for the year
ended December 31, 2003, of which $18,000 was collected.
At December 31,
------------------------------------------------- ----
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(In thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to -four family............................. $ 95 $ 99 $ 182 $ 201 $214
All other mortgage loans......................... 55 134 -- -- --
Non-mortgage loans:
Commercial....................................... 39 12 169 206 --
Consumer......................................... 185 126 186 175 210
------- ------ ------ ------- -----
Total.............................................. $ 374 $ 371 $ 537 $ 582 $424
------- ------ ------ ------- -----
Accruing loans which are contractually
past due 90 days or more:
Mortgage loans:
One- to -four family............................. $ -- $ -- $ -- $ -- $ --
All other mortgage loans......................... -- -- -- -- --
Non-mortgage loans:
Commercial ...................................... -- -- -- -- --
Consumer......................................... 27 47 56 83 73
------- ------ ------ ------- -----
Total.............................................. $ 27 $ 47 $ 56 $ 83 $ 73
------- ------ ------ ------- -----
Total non-performing loans......................... $ 401 $ 418 $ 593 $ 665 $ 497
Real estate owned.................................. $ 34 $ 26 $ -- $ -- $ --
------- ------ ------ ------- -----
Total non-performing assets........................ $ 435 $ 444 $ 593 $ 665 $ 497
======= ====== ====== ======= =====
Total non-performing loans to total loans.......... 0.26% 0.25% 0.43% 0.51% 0.42%
======= ====== ====== ======= =====
Total non-performing assets to total assets........ 0.13% 0.13% 0.19% 0.25% 0.19%
======= ====== ====== ======= =====
Classified Assets. Management, in compliance with regulatory
guidelines, has instituted an internal loan review program, whereby loans are
classified as special mention, substandard, doubtful or loss. When a loan is
classified as substandard or doubtful management is required to establish a
general valuation reserve for loan losses in an amount that is deemed prudent.
General allowances represent loss allowances which have been established to
recognize inherent risk associated with lending activities, but which, unlike
specific allowances, have not been allocated to particular problem assets. When
management classifies a loan as a loss asset, a reserve equal to 100% of the
loan balance is required to be established or the loan is to be charged-off.
An asset is considered "substandard" if it is inadequately protected by
the paying capacity and net worth of the obligor or the collateral pledged, if
any. "Substandard" assets include those characterized by the "distinct
possibility" that the company will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," "highly
8
questionable and improbable," on the basis of currently existing facts,
conditions, and values. Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the company to a sufficient degree of risk to
warrant classification in one of the aforementioned categories but possess
credit deficiencies or potential weaknesses are required to be designated
"special mention" by management. In addition, each loan that exceeds $500,000
and each group of loans to one borrower that exceeds $500,000 is monitored more
closely due to the potentially greater losses from such loans.
Management's evaluation of the classification of assets and the
adequacy of the reserve for loan losses is reviewed by the Board on a regular
basis and by the regulatory agencies as part of their examination process.
The following table sets forth the Company's classified assets in
accordance with its classification system.
At December 31, 2003
(In thousands)
Special Mention.............. $ 608
Substandard.................. 945
Doubtful .................... --
Loss ........................ --
---------
$ 1,553
=========
Allowance for Loan Losses. A provision for loan losses is charged to
operations based on management's evaluation of the potential losses that may be
incurred in the Company's loan portfolio. Such evaluation, which includes a
review of all loans of which full collectibility of interest and principal may
not be reasonably assured, considers the Company's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, estimated value of any underlying collateral,
and current economic conditions.
The allowance for loan losses is based upon management's quarterly
review of the loan portfolio. The purposes of the review is to assess loan
quality, analyze delinquencies, evaluate potential charge-offs, and identify
potential problem loans. Commercial mortgage loans are selected for individual
review based upon delinquency status or larger balance loans. Consumer loans are
generally reviewed in the aggregate as they are of relative small dollar amounts
and homogeneous in nature. Individual loans reviewed are assigned
classifications based upon the borrowers delinquency status and payment history,
the overall risk of the loan, financial capacity of the borrower, the collateral
securing the loan, overall economic conditions in the market, and consideration
to examinations given by regulatory authorities.
To determine the allowance and corresponding provision, the amount
required based upon loans which have been internally classified as a result of
the review is first determined. In addition, an allocation of non-classified
loans is determined based upon historical loss percentages and overall economic
conditions in the market. These amounts are combined to determine the level of
the allowance necessary to absorb losses within the entire loan portfolio which
consists of loans made primarily within the Company's primary market area of
southwestern Pennsylvania.
9
The historical loss experience model that is used to establish the loan
loss factors for both classified and non-classified loans is designed to be
self-correcting by taking into account the Company's recent loss experience.
Pooled loan loss factors are adjusted quarterly, if necessary, based upon the
level of net charge-offs expected by management. Furthermore, the Company's
methodology permits adjustments to any loss factor used in the computation of
the allowance in the event that, in management's judgement, significant
conditions which affect the collectibility of the portfolio as of the evaluation
date are not reflected in the loss factors.
The allowance for loan losses is maintained at a level that represents
management's best estimates of losses in the loan portfolio at the balance sheet
date. However, there can be no assurance that the allowance for losses will be
adequate to cover losses which may be realized in the future and that additional
provisions for losses will not be required.
10
The following table sets forth certain information regarding the
Company's allowance for loan losses at the dates indicated.
For the Year Ended December 31,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(In thousands)
Total loans outstanding...................... $154,080 $166,319 $139,037 $130,088 $119,189
======== ======== ======== ======== ========
Average loans outstanding.................... $163,565 $154,349 $131,878 $125,964 $111,050
======== ======== ======== ======== ========
Allowance balance (at beginning of
period).................................... $ 1,684 $ 1,506 $ 1,455 $ 1,360 $ 1,287
Provision for loan losses.................... 620 735 520 555 410
Charge-offs:
Mortgage loans (except commercial)......... 55 21 -- 8 15
Commercial mortgages....................... -- -- -- -- --
Commercial ................................ 88 10 -- -- --
Consumer................................... 587 594 498 503 373
-------- -------- -------- -------- --------
730 625 498 511 388
-------- -------- -------- -------- --------
Recoveries
Mortgage loans (except commercial)........ (7) (7) -- (1) (1)
Commercial mortgages...................... -- -- -- -- --
Commercial ............................... -- (1) -- -- --
Consumer.................................. (67) (60) (29) (50) (50)
-------- -------- -------- -------- --------
( 74) (68) (29) (51) (51)
-------- -------- -------- -------- --------
Net loans charged-off........................ 656 557 469 460 337
-------- -------- -------- -------- --------
Allowance balance, at end of period.......... $ 1,648 $ 1,684 $ 1,506 $ 1,455 $ 1,360
======== ======== ======== ======== ========
Allowance for loan losses as a percent
of total loans outstanding................. 1.07% 1.01% 1.08% 1.12% 1.14%
======== ======== ======== ======== ========
Net loans charged-off as a percent of
average loans outstanding.................. 0.40% 0.36% 0.36% 0.37% 0.30%
======== ======== ======== ======== ========
11
Allocation of Allowance for Loan Losses. The following table sets forth
the breakdown of the allowance for loan losses by loan category and the percent
of loans in each category to total loans receivable for the periods indicated.
The allocation of the allowance to each category is not necessarily indicative
of future losses and does not restrict the use of the allowances to absorb
losses in any category.
At December 31,
----------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---------------------- ---------------------- --------------------- --------------------- ----------------------
% of loans in % of loans in % of loans in % of loans in % of loans in
each category each category each category each category each category
Amount to total loans Amount to total loans Amount to total loans Amount to total loans Amount to total loans
------ -------------- ------ -------------- ------ -------------- ------ -------------- ------ --------------
(In thousands)
Mortgage
loans........ $ 218 44.65% $ 255 43.89% $ 259 51.10% $ 260 48.65% $ 266 46.76%
Commercial
loans
and lease
financing
receivables.. 400 13.62 417 14.99 282 4.82 197 5.45 122 3.97
Consumer
loans........ 1,030 41.73 1,012 41.12 965 44.08 998 45.90 972 49.27
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$1,648 100.00% $1,684 100.00% $1,506 100.00% $1,455 100.00% $1,360 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
12
Investment Activities
The Bank is required under federal regulation to maintain a sufficient
level of liquid assets (including specified short-term securities and certain
other investments), as determined by management and defined and reviewed for
adequacy by the Federal Deposit Insurance Corporation during its regular
examinations. The Federal Deposit Insurance Corporation, however, does not
prescribe by regulation a minimum amount or percentage of liquid assets. The
level of liquid assets varies depending upon several factors, including: (i) the
yields on investment alternatives, (ii) management's judgment as to the
attractiveness of the yields then available in relation to other opportunities,
(iii) expectation of future yield levels, and (iv) management's projections as
to the short-term demand for funds to be used in loan origination and other
activities.
Investment securities, including mortgage-backed securities, are
classified at the time of purchase, based upon management's intentions and
abilities, as securities held to maturity or securities available for sale. Debt
securities acquired with the intent and ability to hold to maturity are
classified as held to maturity and are stated at cost and adjusted for
amortization of premium and accretion of discount, which are computed using the
level yield method and recognized as adjustments of interest income. All other
debt securities are classified as available for sale to serve principally as a
source of liquidity. At December 31, 2003, the Company had no securities of a
single issuer, excluding U.S. government and agency securities, that exceeded
10% of stockholder's equity.
Current regulatory and accounting guidelines regarding investment
securities (including mortgage backed securities) require the Company to
categorize securities as "held to maturity," "available for sale" or "trading."
As of December 31, 2003, Company had securities classified as "held to maturity"
and "available for sale" in the amount of $63.8 million and $104.6million,
respectively and had no securities classified as "trading." Securities
classified as "available for sale" are reported for financial reporting purposes
at the fair market value with net changes in the market value from period to
period included as a separate component of stockholders' equity, net of income
taxes. At December 31, 2003, the Company's securities available for sale had an
amortized cost of $102.3 million and market value of $104.6 million. The changes
in market value in the Company's available for sale portfolio reflect normal
market conditions and vary, either positively or negatively, based primarily on
changes in general levels of market interest rates relative to the yields of the
portfolio. Additionally, changes in the market value of securities available for
sale do not affect the Company's income nor does it affect the Bank's regulatory
capital requirements or its loan-to-one borrower limit.
At December 31, 2003, the Company's investment portfolio policy allowed
investments in instruments such as: (i) U.S. Treasury obligations, (ii) U.S.
federal agency or federally sponsored agency obligations, (iii) local municipal
obligations, (iv) mortgage-backed securities, (v) banker's acceptances, (vi)
certificates of deposit, (vii) investment grade corporate bonds and commercial
paper, (viii) real estate mortgage investment conduits, and (ix) equity
securities. The Board of Directors may authorize additional investments.
As a source of liquidity and to supplement Company's lending
activities, the Company has invested in residential mortgage-backed securities.
Mortgage-backed securities can serve as collateral for borrowings and, through
repayments, as a source of liquidity. Mortgage-backed securities represent a
participation interest in a pool of single-family or other type of mortgages.
Principal and interest payments are passed from the mortgage originators,
through intermediaries (generally quasi-governmental agencies) that pool and
repackage the participation interests in the form of securities, to investors,
like the Company.
13
The quasi-governmental agencies guarantee the payment of principal and interest
to investors and include Freddie Mac, Ginnie Mae, and Fannie Mae.
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed rate or adjustable
rate mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed rate
or adjustable rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages. Expected maturities will differ from contractual
maturities due to scheduled repayments and because borrowers may have the right
to call or prepay obligations with or without prepayment penalties.
Mortgage-backed securities issued by Freddie Mac, Ginnie Mae, and Fannie Mae
make up a majority of the pass-through certificates market.
The Company also invests in mortgage-related securities, primarily
collateralized mortgage obligations ("CMOs"), issued or sponsored by Freddie
Mac, Ginnie Mae, and Fannie Mae, as well as private issuers. CMOs are a type of
debt security that aggregates pools of mortgages and mortgage-backed securities
and creates different classes of CMO securities with varying maturities and
amortization schedules as well as a residual interest with each class having
different risk characteristics. The cash flows from the underlying collateral
are usually divided into "tranches" or classes whereby tranches have descending
priorities with respect to the distribution of principal and interest repayment
of the underlying mortgages and mortgage backed securities as opposed to pass
through mortgage backed securities where cash flows are distributed pro rata to
all security holders. Unlike mortgage backed-securities from which cash flow is
received and prepayment risk is shared pro rata by all securities holders, cash
flows from the mortgages and mortgage backed securities underlying CMOs are paid
in accordance with a predetermined priority to investors holding various
tranches of such securities or obligations. A particular tranche or class may
carry prepayment risk which may be different from that of the underlying
collateral and other tranches. CMOs attempt to moderate reinvestment risk
associated with conventional mortgage-backed securities resulting from
unexpected prepayment activity.
14
The following tables set forth the carrying value of the Company's
investment securities held to maturity, securities available for sale, FHLB
stock, and interest bearing deposits and overnight investments at the dates
indicated.
At December 31,
--------------------------------------
2003 2002 2001
---- ---- ----
(In thousands)
Investment and mortgage-backed
securities held to maturity:
U.S. Government agency securities...................... $ 5,697 $16,750 $23,490
Obligations of states and political subdivisions....... 2,255 2,525 2,769
Mortgage-backed securities............................. 55,843 70,346 30,180
------- ------- -------
Total investment and mortgage-backed securities.... 63,795 89,621 56,439
Interest-bearing deposits.............................. 754 1,284 28,195
FHLB stock............................................. 3,607 3,620 2,615
------- ------- -------
Total investments................................... $68,156 $94,525 $87,249
======= ======= =======
At December 31,
--------------------------------------
2003 2002 2001
---- ---- ----
(In thousands)
Investment and mortgage-backed
securities available for sale:
U.S. Government treasury securities.................... $ 4,989 $ 6,999 $ 1,037
U.S. Government agency securities...................... 9,612 1,109 1,089
Real estate mortgage investment conduits............... 17 25 36
Obligations of states and political subdivision........ 4,874 13,658 19,217
Corporate obligations.................................. 1,120 1,112 --
Equity Securities...................................... 8,107 4,330 1,523
Mortgage-backed securities............................. 75,911 44,137 54,604
-------- ------- -------
Total............................................... $104,630 $71,370 $77,506
======== ======= =======
15
Investment and Mortgage-Backed Securities Maturities
The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of the Company's
investment and mortgage-backed securities portfolio at December 31, 2003. The
table does not include interest bearing deposits or FHLB stock and does not take
into consideration the effects of scheduled repayments or the effects of
possible prepayments.
Total Investment and
One Year or Less One to Five Years Five to Ten Years More than Ten Years Mortgage-backed Securities
---------------- ----------------- ----------------- ------------------- --------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield(1) Value Yield(1) Value Yield(1) Value Yield(1) Value Yield(1) Value
----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(In thousands)
Held to Maturity:
U.S. Government
agency securities...... $ 994 7.09% $ 1,000 3.71% $ 2,784 1.55% $ 919 1.55% $ 5,697 2.90% $ 5,862
Obligations of
states and
political
subdivisions........... 498 7.19 -- -- -- -- 1,757 7.39 2,255 7.35 2,341
Mortgage-backed
securities............. -- -- 3,749 5.00 31,919 4.67 20,175 5.38 55,843 4.95 56,194
------- ---- ------- ---- ------- ---- ------- ---- -------- ---- --------
Total................ $ 1,492 7.12% $ 4,749 4.73% $34,703 4.42% $22,851 5.38% $ 63,795 4.85% $ 64,397
======= ==== ======= ==== ======= ==== ======= ==== ======== ==== ========
Available for sale:
U.S. Government
treasury
obligations............ $ 4,989 1.00% $ -- -- $ -- -- $ -- -- $ 4,989 1.00% $ 4,989
U.S. Government
agency securities...... 8,549 1.19 1,063 7.29 -- -- -- -- 9,612 1.86 9,612
Obligations of states
and political
subdivisions........... -- - 2,268 7.54 -- -- 2,606 7.50 4,874 7.52 4,874
Corporate securities..... 604 4.50 516 5.40 -- -- -- -- 1,120 4.91 1,120
Real estate mortgage
investment conduits.... -- -- -- -- -- -- 17 1.88 17 1.88 17
Equity securities........ 8,107 2.67 -- -- -- -- -- -- 8,107 2.67 8,107
Mortgage-backed
securities............. 1 9.00 137 7.42 8,376 4.07 67,397 5.21 75,911 5.09 75,911
------- ---- ------- ---- ------- ---- ------- ---- -------- ---- --------
Total................ $22,250 1.78% $ 3,984 7.19% $ 8,376 4.07% $70,020 5.29% $104,630 4.52% $104,630
======= ==== ======= ==== ======= ==== ======= ==== ======== ==== ========
- --------------
(1) Average yields on tax exempt obligations have been computed on a tax
equivalent basis assuming a 34% tax rate.
16
Sources of Funds
Deposits are the Company's major external source of funds for lending
and other investment purposes. Funds are also derived from the receipt of
payments on loans and prepayment of loans and maturities of investment and
mortgage-backed securities and, to a much lesser extent, borrowings and
operations. Scheduled loan principal repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and market conditions.
Deposits. Consumer and commercial deposits are attracted principally
from within the Company's primary market area through the offering of a
selection of deposit instruments including regular savings accounts, money
market accounts, and term certificate accounts. IRA accounts are also offered.
Deposit account terms vary according to the minimum balance required, the time
period the funds must remain on deposit, and the interest rate. The interest
rates paid by the Company on deposits are set weekly at the direction of the
Board of Directors. Interest rates are determined based on the Company's
liquidity requirements, interest rates paid by the Company's competitors, and
the Company's growth goals and applicable regulatory restrictions and
requirements. At December 31, 2003, the Company had no brokered deposits.
The following table indicates the amount of the Company's certificates
of deposit of $100,000 or more by time remaining until maturity as of December
31, 2003.
Certificates
Maturity Period of Deposits
- --------------- -----------
(In thousands)
Less than 90 days............................. $ 1,850
3 months to 6 months.......................... 16,530
6 months to 1 year............................ 4,967
Greater than 1 year........................... 10,389
--------
Total certificates of deposit with
balances of $100,000 or more $ 33,736
========
Borrowings
The Bank may obtain advances from the FHLB of Pittsburgh to supplement
its supply of lendable funds. Advances from the FHLB of Pittsburgh are typically
secured by a pledge of the Bank's stock in the FHLB of Pittsburgh and a portion
of the Bank's first mortgage loans and certain other assets. Each FHLB credit
program has its own interest rate, which may be fixed or variable, and range of
maturities. The Bank, if the need arises, may also access the Federal Reserve
Bank discount window to supplement its supply of lendable funds and to meet
deposit withdrawal requirements.
17
The following table sets forth information concerning FHLB advances
during the periods indicated (includes both short- and long-term advances).
At or For the Years
Ended December 31,
------------------
2003 2002 2001
---- ---- ----
(In thousands)
FHLB advances:
Average outstanding........................ $56,462 $57,862 $47,592
======= ======= =======
Maximum amount outstanding at any
month-end during the year................ 66,008 66,325 51,195
------- ------- -------
Weighted average interest rate during
the year................................ 5.22% 5.35% 5.53%
------- ------- -------
Total FHLB advances at end of period....... 58,880 61,008 50,325
------- ------- -------
Weighted Year End Rate..................... 4.96% 4.93% 5.41%
------- ------- -------
Personnel
As of December 31, 2003, the Company had 78 full-time employees and 11
part-time employees. The employees are not represented by a collective
bargaining unit. The Company believes its relationship with its employees to be
satisfactory.
Subsidiaries
The only direct subsidiary of the Company is the Bank. The Bank has one
wholly-owned subsidiary, HOMECO, a Pennsylvania corporation. HOMECO has been
inactive since 1993.
Regulation
Set forth below is a brief description of certain laws which relate to
the regulation and supervision of the Company and the Bank. The description does
not purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
Regulation of the Company
Set forth below is a brief description of certain laws which related to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
General. The Company, as a bank holding company under the Bank Holding
Company Act of 1956, as amended, is subject to regulation, supervision and
examination by the Board of Governors of the Federal Reserve System and by the
Pennsylvania Department of Banking. The Company is also required to file
annually a report of its operations with the Federal Reserve and the
Pennsylvania Department of Banking. This regulation and oversight is generally
intended to ensure that the Company limits its
18
activities to those allowed by law and that it operates in a safe and sound
manner without endangering the financial health of the Bank.
Under the Bank Holding Company Act, the Company must obtain the prior
approval of the Federal Reserve before it may acquire control of another bank or
bank holding company, merge or consolidate with another bank holding company,
acquire all or substantially all of the assets of another bank or bank holding
company, or acquire direct or indirect ownership or control of any voting shares
of any bank or bank holding company if, after such acquisition, the Company
would directly or indirectly own or control more than 5% of such shares.
Federal statutes impose restrictions on the ability of a bank holding
company and its nonbank subsidiaries to obtain extensions of credit from its
subsidiary bank, on the subsidiary bank's investments in the stock or securities
of the holding company, and on the subsidiary bank's taking of the holding
company's stock or securities as collateral for loans to any borrower. A bank
holding company and its subsidiaries are also prevented from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property, or furnishing of services by the subsidiary bank.
A bank holding company is required to serve as a source of financial
and managerial strength to its subsidiary banks and may not conduct its
operations in an unsafe or unsound manner. In addition, it is the Federal
Reserve policy that a bank holding company should stand ready to use available
resources to provide adequate capital to its subsidiary banks during periods of
financial stress or adversity and should maintain the financial flexibility and
capital-raising capacity to obtain additional resources for assisting its
subsidiary banks. A bank holding company's failure to meet its obligations to
serve as a source of strength to its subsidiary banks will generally be
considered by the Federal Reserve to be an unsafe and unsound banking practice
or a violation of the Federal Reserve regulations, or both.
Non-Banking Activities. The business activities of the Company, as a
bank holding company, are restricted by the Bank Holding Company Act. Under the
Bank Holding Company Act and the Federal Reserve's bank holding company
regulations, the Company may only engage in, or acquire or control voting
securities or assets of a company engaged in, (1) banking or managing or
controlling banks and other subsidiaries authorized under the Bank Holding
Company Act and (2) any non-banking activity the Federal Reserve has determined
to be so closely related to banking or managing or controlling banks to be a
proper incident thereto. These include any incidental activities necessary to
carry on those activities, as well as a lengthy list of activities that the
Federal Reserve has determined to be so closely related to the business of
banking as to be a proper incident thereto.
Financial Modernization. The Gramm-Leach-Bliley Act, which became
effective in March 2000, permits greater affiliation among banks, securities
firms, insurance companies, and other companies under a new type of financial
services company known as a "financial holding company." A financial holding
company essentially is a bank holding company with significantly expanded
powers. Financial holding companies are authorized by statute to engage in a
number of financial activities previously impermissible for bank holding
companies, including securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies; insurance underwriting and
agency; and merchant banking activities. The act also permits the Federal
Reserve and the Treasury Department to authorize additional activities for
financial holding companies if they are "financial in nature" or "incidental" to
financial activities. A bank holding company may become a financial holding
company if each of its subsidiary banks is well capitalized, well managed, and
has at least a "satisfactory" CRA rating. A financial holding company must
provide notice to the Federal Reserve within 30 days after commencing activities
previously determined by statute or by the Federal Reserve and Department of the
Treasury to be permissible. The
19
Company has not submitted notice to the Federal Reserve of an intent to be
deemed a financial holding company.
Regulatory Capital Requirements. The Federal Reserve has adopted
capital adequacy guidelines under which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the Bank Holding Company Act. The Federal Reserve's capital adequacy
guidelines are similar to those imposed on the Bank by the Federal Deposit
Insurance Corporation. See "Regulation of the Bank - Regulatory Capital
Requirements."
Restrictions on Dividends. The Pennsylvania Banking Code states, in
part, that dividends may be declared and paid only out of accumulated net
earnings and may not be declared or paid unless surplus (retained earnings) is
at least equal to contributed capital. The Bank has not declared or paid any
dividends that have caused its retained earnings to be reduced below the amount
required. Finally, dividends may not be declared or paid if the Bank is in
default in payment of any assessment due the Federal Deposit Insurance
Corporation.
The Federal Reserve has issued a policy statement on the payment of
cash dividends by bank holding companies, which expresses the Federal Reserve's
view that a bank holding company should pay cash dividends only to the extent
that the holding company's net income for the past year is sufficient to cover
both the cash dividends and a rate of earnings retention that is consistent with
the holding company's capital needs, asset quality and overall financial
condition. The Federal Reserve also indicated that it would be inappropriate for
a company experiencing serious financial problems to borrow funds to pay
dividends. Furthermore, under the federal prompt corrective action regulations,
the Federal Reserve may prohibit a bank holding company from paying any
dividends if the holding company's bank subsidiary is classified as
"undercapitalized."
Sarbanes-Oxley Act of 2002.
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act
of 2002 (the "Act"). The Securities and Exchange Commission (the "SEC") has
promulgated new regulations pursuant to the Act and may continue to propose
additional implementing or clarifying regulations as necessary in furtherance of
the Act. The passage of the Act by Congress and the implementation of new
regulations by the SEC subject publicly-traded companies to additional and more
cumbersome reporting regulations and disclosure. Compliance with the Act and
corresponding regulations may increase the Company's expenses.
Regulation of the Bank
General. As a Pennsylvania chartered savings bank with deposits insured
by the Savings Association Insurance Fund of the Federal Deposit Insurance
Corporation, the Bank is subject to extensive regulation and examination by the
Pennsylvania Department of Banking and by the Federal Deposit Insurance
Corporation, which insures its deposits to the maximum extent permitted by law.
The federal and state laws and regulations applicable to banks regulate, among
other things, the scope of their business, their investments, the reserves
required to be kept against deposits, the timing of the availability of
deposited funds and the nature and amount of and collateral for certain loans.
The laws and regulations governing the Bank generally have been promulgated to
protect depositors and not for the purpose of protecting stockholders. This
regulatory structure also gives the federal and state banking agencies extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan
20
loss reserves for regulatory purposes. Any change in such regulation, whether by
the Pennsylvania Department of Banking, the Federal Deposit Insurance
Corporation or the United States Congress, could have a material impact on the
Bank and its operations.
Federal law provides the federal banking regulators, including the
Federal Deposit Insurance Corporation and the Federal Reserve, with substantial
enforcement powers. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders, and to initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities.
Pennsylvania Savings Bank Law. The Pennsylvania Banking Code contains
detailed provisions governing the organization, location of offices, rights and
responsibilities of trustees, officers, and employees, as well as corporate
powers, savings and investment operations and other aspects of the Bank and its
affairs. The code delegates extensive rule-making power and administrative
discretion to the Pennsylvania Department of Banking so that the supervision and
regulation of state chartered savings banks may be flexible and readily
responsive to changes in economic conditions and in savings and lending
practices.
The code also provides state-chartered savings banks with all of the
powers enjoyed by federal savings and loan associations, subject to regulation
by the Pennsylvania Department of Banking. The Federal Deposit Insurance
Corporation Act, however, prohibits a state-chartered bank from making new
investments, loans, or becoming involved in activities as principal and equity
investments which are not permitted for national banks unless (1) the Federal
Deposit Insurance Corporation determines the activity or investment does not
pose a significant risk of loss to the Savings Association Insurance Fund and
(2) the bank meets all applicable capital requirements. Accordingly, the
additional operating authority provided to the Bank by the code is significantly
restricted by the Federal Deposit Insurance Act.
Federal Deposit Insurance. The Federal Deposit Insurance Corporation is
an independent federal agency that insures the deposits, up to prescribed
statutory limits, of federally insured banks and savings institutions and
safeguards the safety and soundness of the banking and savings industries. The
Federal Deposit Insurance Corporation administers two separate insurance funds,
the Bank Insurance Fund, which generally insures commercial bank and state
savings bank deposits, and the Savings Association Insurance Fund, which
generally insures savings association deposits. The Bank, which was previously a
state savings association, remains a member of the Savings Association Insurance
Fund and its deposit accounts are insured by the Federal Deposit Insurance
Corporation, up to prescribed limits.
The Federal Deposit Insurance Corporation is authorized to establish
separate annual deposit insurance assessment rates for members of the Bank
Insurance Fund and the Savings Association Insurance Fund, and to increase
assessment rates if it determines such increases are appropriate to maintain the
reserves of either insurance fund. In addition, the Federal Deposit Insurance
Corporation is authorized to levy emergency special assessments on Bank
Insurance Fund and Savings Association Insurance Fund members. The Federal
Deposit Insurance Corporation's deposit insurance premiums are assessed through
a risk-based system under which all insured depository institutions are placed
into one of nine categories and assessed insurance premiums based upon their
level of capital and supervisory evaluation, with the assessment rate for most
institutions set at 0%.
21
In addition, all institutions with deposits insured by the Federal
Deposit Insurance Corporation are required to pay assessments to fund interest
payments on bonds issued by the Financing Corporation, an agency of the Federal
government established to recapitalize the predecessor to the Savings
Association Insurance Fund. These assessments will continue until the Financing
Corporation bonds mature in 2017.
Regulatory Capital Requirements. The Federal Deposit Insurance
Corporation has promulgated capital adequacy requirements for state-chartered
banks that, like the Bank, are not members of the Federal Reserve System. At
December 31, 2003, the Bank exceeded all regulatory capital requirements and was
classified as "well capitalized."
The Federal Deposit Insurance Corporation's capital regulations
establish a minimum 3% Tier 1 leverage capital requirement for the most highly
rated state-chartered, non-member banks, with an additional cushion of at least
100 to 200 basis points for all other state-chartered, non-member banks, which
effectively increases the minimum Tier 1 leverage ratio for such other banks to
4% to 5% or more. Under the Federal Deposit Insurance Corporation's regulation,
the highest-rated banks are those that the Federal Deposit Insurance Corporation
determines are not anticipating or experiencing significant growth and have well
diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity, good earnings and, in general, which are
considered a strong banking organization, rated composite 1 under the Uniform
Financial Institutions Rating System. Tier 1 or core capital is defined as the
sum of common stockholders' equity (including retained earnings), noncumulative
perpetual preferred stock and related surplus, and minority interests in
consolidated subsidiaries, minus all intangible assets other than certain
mortgage and non-mortgage servicing assets and purchased credit card
relationships.
The Federal Deposit Insurance Corporation's regulations also require
that state-chartered, non- member banks meet a risk-based capital standard. The
risk-based capital standard requires the maintenance of total capital (which is
defined as Tier 1 capital and supplementary (Tier 2) capital) to risk weighted
assets of 8%. In determining the amount of risk-weighted assets, all assets,
plus certain off balance sheet assets, are multiplied by a risk-weight of 0% to
100%, based on the risks the Federal Deposit Insurance Corporation believes are
inherent in the type of asset or item. The components of Tier 1 capital for the
risk-based standards are the same as those for the leverage capital requirement.
The components of supplementary (Tier 2) capital include cumulative perpetual
preferred stock, mandatory subordinated debt, perpetual subordinated debt,
intermediate-term preferred stock, up to 45% of unrealized gains on equity
securities and a bank's allowance for loan and lease losses. Allowance for loan
and lease losses includable in supplementary capital is limited to a maximum of
1.25% of risk-weighted assets. Overall, the amount of supplementary capital that
may be included in total capital is limited to 100% of Tier 1 capital.
A bank that has less than the minimum leverage capital requirement is
subject to various capital plan and activities restriction requirements. The
Federal Deposit Insurance Corporation's regulations also provide that any
insured depository institution with a ratio of Tier 1 capital to total assets
that is less than 2.0% is deemed to be operating in an unsafe or unsound
condition pursuant to Section 8(a) of the Federal Deposit Insurance Act and
could be subject to termination of deposit insurance.
The Bank is also subject to minimum capital requirements imposed by the
Pennsylvania Department of Banking on Pennsylvania-chartered depository
institutions. Under the Pennsylvania Department of Banking's capital
regulations, a Pennsylvania bank or savings bank must maintain a minimum
leverage ratio of Tier 1 capital (as defined under the Federal Deposit Insurance
Corporation's capital regulations) to total assets of 4%. In addition, the
Pennsylvania Department of Banking has the supervisory discretion to require a
higher leverage ratio for any institutions based on the institution's
22
substandard performance in any of a number of areas. The Bank was in compliance
with both the Federal Deposit Insurance Corporation and the Pennsylvania
Department of Banking capital requirements as of December 31, 2003.
Affiliate Transaction Restrictions. Federal laws strictly limit the
ability of banks to engage in transactions with their affiliates, including
their bank holding companies. Such transactions between a subsidiary bank and
its parent company or the nonbank subsidiaries of the bank holding company are
limited to 10% of a bank subsidiary's capital and surplus and, with respect to
such parent company and all such nonbank subsidiaries, to an aggregate of 20% of
the bank subsidiary's capital and surplus. Further, loans and extensions of
credit generally are required to be secured by eligible collateral in specified
amounts. Federal law also requires that all transactions between a bank and its
affiliates be on terms as favorable to the bank as transactions with
non-affiliates.
Federal Home Loan Bank System. The Bank is a member of the Federal Home
Loan Bank of Pittsburgh, which is one of 12 regional Federal Home Loan Banks.
Each Federal Home Loan Bank serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from funds deposited by
member institutions and proceeds from the sale of consolidated obligations of
the Federal Home Loan Bank system. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the board of trustees of
the Federal Home Loan Bank.
As a member, it is required to purchase and maintain stock in the
Federal Home Loan Bank of Pittsburgh in an amount equal to the greater of 1% of
its aggregate unpaid residential mortgage loans, home purchase contracts or
similar obligations at the beginning of each year or 5% of its outstanding
advances from the Federal Home Loan Bank. At December 31, 2003, the Bank was in
compliance with this requirement.
Federal Reserve System. The Federal Reserve requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking and NOW accounts) and
non-personal time deposits. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve may be used to satisfy the liquidity
requirements that are imposed by the Department. At December 31, 2003, the Bank
met its reserve requirements.
Loans to One Borrower. Under Pennsylvania and federal law, savings
banks have, subject to certain exemptions, lending limits to one borrower in an
amount equal to 15% of the institution's capital accounts. An institution's
capital account includes the aggregate of all capital, surplus, undivided
profits, capital securities and general reserves for loan losses. As of December
31, 2003, the Bank's loans-to-one borrower limitation was $5.9 million and was
in compliance with such limitation.
Item 2. Properties
- --------------------
(a) Properties
At December 31, 2003, the Company operated from its main office, 9
branch offices and an administrative office located in the counties of Beaver
and Lawrence, Pennsylvania. All offices are owned except for one branch office.
The lease has an initial term of 10 years, with a renewal option for an
additional 10 years.
23
Item 3. Legal Proceedings
- --------------------------
There are various claims and lawsuits in which the Company or the Bank
are periodically involved, such as claims to enforce liens, condemnation
proceedings on properties in which the Bank holds security interests, claims
involving the making and servicing of real property loans, and other issues
incident to the Bank's business. In the opinion of management, no material loss
is expected from any of such pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security-Holders
- ------------------------------------------------------------
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Stock Market Information" in the
Registrant's Annual Report to Stockholders for the fiscal year ended December
31, 2003 (the "Annual Report") and is incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The above-captioned information appears under the section captioned
"Selected Financial and Other Data" in the Annual Report and is incorporated
herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The information contained in the subsection captioned "Market Risk
Analysis" under the section captioned "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Annual Report is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The Registrant's financial statements listed in Item 15 are
incorporated herein by reference from the Annual Report.
Item 9. Changes In and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 9A. Controls and Procedures
- ---------------------------------
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange
24
Act of 1934 (the "Exchange Act")), the Company's principal executive officer and
principal financial officer have concluded that as of the end of the period
covered by this Annual Report on Form 10-K such disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
(b) Changes in internal control over financial reporting. During the
last quarter of the year under report, there was no change in the Company's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant
- -------------------------------------------------------------
The information required under this item is incorporated herein by
reference to the Proxy Statement for the 2004 Annual Meeting (the "Proxy
Statement") contained under the sections captioned "Section 16(a) Beneficial
Ownership Reporting Compliance," "Proposal I - Election of Directors," and
"- Biographical Information."
The Company has adopted a Code of Ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller or persons performing similar functions. The Company's Code of Ethics
is filed as Exhibit 14 to this Annual Report on Form 10-K.
Item 11. Executive Compensation
- --------------------------------
The information required by this item is incorporated by reference to
the Proxy Statement contained under the section captioned "Director and
Executive Officer Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
The information required by this item is incorporated herein
by reference to the section captioned "Principal Holders" of
the Proxy Statement.
(b) Security Ownership of Management
The information required by this item is incorporated herein
by reference to the sections captioned "Principal Holders" and
"Proposal I - Election of Directors" the Proxy Statement.
(c) Changes in Control
Management of the Company knows of no arrangements, including
any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change
in control of the Company.
(d) Securities Authorized for Issuance Under Equity Compensation
Plans
25
Set forth below is information as of December 31, 2003 with respect to
compensation plans under which equity securities of the Registrant are
authorized for issuance.
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
Number of securities
Number of securities Weighted-average remaining available for
to be issued upon exercise price of future issuance under
exercise of outstanding equity compensation plans
outstanding options, options, warrants (excluding securities
warrants and rights and rights reflected in column (a))
------------------- ---------- ------------------------
Equity compensation plans
approved by shareholders:
2002 Stock Option Plan............ 154,000 15.51 -
2002 Restricted Stock Plan........ N/A N/A -
1998 Stock Option Plan............ 159,129 9.22 -
1998 Restricted Stock Plan........ N/A N/A -
Equity compensation
plans not approved by
shareholders(1): N/A N/A N/A
------- ---------- -----
TOTAL......................... 313,129 $ 12.32 -
======= ========== =====
- ------------
(1) Not applicable.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Certain Relationships and Related
Transactions" in the Proxy Statement.
Item 14. Principal Accounting Fees and Services
- ------------------------------------------------
The information called for by this item is incorporated herein by
reference to the section captioned "Audit Fees and Services" in the Proxy
Statement.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) Listed below are all financial statements and exhibits filed
as part of this report.
1. The consolidated balance sheet of PHSB Financial Corporation
and subsidiary as of December 31, 2003 and 2002, and the
related consolidated statements of income, comprehensive
income, changes in stockholders' equity and cash flows for
each of the
26
three years in the period ended December 31, 2003, together
with the related notes and the independent auditors' report of
S.R. Snodgrass, A.C., independent accountants.
2. The following exhibits are included in this Report or incorporated
herein by reference:
3.1 Articles of Incorporation of PHSB Financial Corporation*
3.2 Bylaws of PHSB Financial Corporation*
4 Specimen Stock Certificate of PHSB Financial Corporation*
10.1 Employment Agreement between Peoples Home Savings Bank and
James P. Wetzel, Jr.*
10.2 1998 Restricted Stock Plan***
10.3 1998 Stock Option Plan***
10.4 Employment Agreement between Peoples Home Savings Bank and
Richard E. Canonge**
10.5 2002 Stock Option Plan***
10.6 2002 Restricted Stock Plan***
13 Annual Report to Stockholders for the fiscal year ended December 31, 2003
14 Code of Ethics
21 Subsidiaries of the Registrant (See Item 1. Business)
23 Consent of Accountants
31 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- -------------
* Incorporated by reference to Registrant's Registration Statement on Form
SB-2 initially filed with the Securities and Exchange Commission on
September 10, 2001 (File No. 333-69180).
** Incorporated by reference to the identically numbered exhibit on Form 10-K
filed with the SEC on March 28, 2002.
*** Incorporated by reference into the Registrant's Registration Statement on
Form S-8 (333-102559) filed with the Securities and Exchange Commission on
January 17, 2003.
(b) Reports on Form 8-K.
A Report on Form 8-K, dated October 10, 2003, was filed with
the SEC on October 10, 2003 to announce the declaration of a
special cash dividend in addition to the regular quarterly
dividend.
A Report on Form 8-K, dated October 15, 2003, was filed with
the SEC on October 15, 2003 to announce earnings for the
quarter ended September 30, 2003.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized as of March 18, 2004.
PHSB FINANCIAL CORPORATION
By: /s/James P. Wetzel, Jr.
--------------------------------
James P. Wetzel, Jr.
President, Chief Executive
Officer and Director
(Duly Authorized Representative)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities indicated as of March 18,
2004.
/s/James P. Wetzel, Jr. /s/Richard E. Canonge
- ----------------------------------- -----------------------------------
James P. Wetzel, Jr. Richard E. Canonge
President, Chief Executive Officer Vice President, Treasurer, and
and Director Chief Financial Officer
(Principal Executive Officer) (Principal Financial Officer)
/s/Joseph D. Belas /s/Douglas K. Brooks
- ----------------------------------- -----------------------------------
Joseph D. Belas Douglas K. Brooks
Director Director
/s/Emlyn Charles /s/John C. Kelly
- ----------------------------------- -----------------------------------
Emlyn Charles John C. Kelly
Director Director
/s/John M. Rowse /s/Howard B. Lenox
- ----------------------------------- -----------------------------------
John M. Rowse Howard B. Lenox
Director Director
28